The Buffet way: Diversify and let the market do the work

May is a big month for Warren Buffett and his conglomerate, Berkshire Hathaway.

That’s when thousands of shareholders descend on Omaha -- more than 30,000 last year -- to attend his annual meeting the first Saturday of the month. They come to eat ice cream at Dairy Queen (one of Berkshire Hathaway’s holdings), shop at Borsheims (the Omaha jewelry store Berkshire has long owned) and dine at Gorat’s and Piccolo’s (his favorite restaurants). This year, the festivities also included a newspaper-tossing contest, a blindfolded chess player and an American table-tennis champion.

Buffett has long called his annual meeting “Woodstock for capitalists.” But it’s really more like a revival meeting.

At 83, Warren Buffet is the second-wealthiest American behind Bill Gates. In his annual letter to shareholders this year, Buffett shares his legendary philosophy on buy-and-hold “value” investing. He explains that readers shouldn’t be distracted by the white noise of the market, and that while he and his long-time partner Charlie Munger may make stock-picking mistakes, they won’t be the kind of disasters “that occur, for example, when a long-rising market induces purchases that are based on anticipated price behavior and a desire to be where the action is.”

Buffett is considered to have such a track record of picking stock winners and avoiding losers that his annual letter to shareholders in his Berkshire Hathaway conglomerate is treated as a major event by the financial media.The smart way to invest, according to Buffet

When the press addresses the subject of beating the market through astute stock picking, the name Warren Buffett usually comes up. But what does this celebrated investor actually say about the smart way to invest?

While many investors hope to follow Buffett in analyzing individual companies in minute detail with the hope of finding a bargain, he advocates that the right approach for most people is to let the market do all the work and worrying for them. He tells investors to diversify and keep costs low.

As to all the predictions out there about interest rates, emerging markets, or geopolitics, there will always be a range of opinions, he says. But we are under no obligation to listen to the media commentators, however distracting they may be.

“Owners of stocks . . . too often let the capricious and irrational behavior of their fellow owners cause them to behave irrationally,” Mr. Buffett says. “Because there is so much chatter about markets, the economy, interest rates, price behavior of stocks, etc., some investors believe it is important to listen to pundits -- and, worse yet, important to consider acting upon their comments.”Focusing on the long term value

What does he think about the Federal Reserve taper? What could be the implications for emerging markets of a Russian military advance into Ukraine? What does an economic slowdown in China mean for developed markets?

Instead of pontificating about the crisis du jour, Buffet tells a folksy story in his most recent annual letter about a farm he has owned for nearly 30 years.

Did he lie awake at night worrying about fluctuations in the farm’s market price? No, says Mr. Buffett, he focused on its long-term value. And he counsels investors to take the same relaxed approach to liquid investments such as shares they own to the value of their family home.

"Those people who can sit quietly for decades when they own a farm or apartment house too often become frenetic when they are exposed to a stream of stock quotations,” Mr. Buffett said. “For these investors, liquidity is transformed from the unqualified benefit it should be to a curse.”

Mr. Buffett’s prescription is really simple, as one might expect from an unassuming, plainspoken octogenarian from Nebraska. He points out that an advanced intellect and success in long-term investment don’t necessarily go together. Diversify and let the market do all your work and worrying for you, he advises....

Heather Cleland, CFP, CDFA, is a partner with Sebastopol-based Willow Creek Wealth Management, Inc. (707-829-1146, willowcreekwealth.com), one of the leading wealth management firms in California.